Keppel Corporation: Looking at the Gas Market

1Q17 Boosted by Disposal Gains

Keppel Corporation (KEP) reported a 28.4% YoY fall in revenue to S$1.25b and a 23.7% rise in net profit to S$260.4m in 1Q17, such that the latter accounted for 29% of our full year estimate. However, this was bumped up by oneoff items such as S$46m of writeback of impairment of investments, S$32m gain on disposal from the sale of 80% interest in PT Sentral Tunjungan Perkasa, as well as S$44m gain from the sale of interest in GE Keppel Energy Services Pte Ltd and Cityone Development (Wuxi) Co.

We estimate recurring net profit of about S$113m, dragged by the offshore marine segment which broke even in 1Q17. The property division, which has lumpy quarterly contributions, saw a 48% YoY fall in revenue to S$262m with lower revenue from China and Singapore.

Sees Opportunities in LNG Space; Question Is When

Looking ahead, management shared that it sees many opportunities in the gas market, especially where Keppel-built carriers and regasification units can be deployed alongside small gas-fired power units. Keppel is also re-purposing its offshore technology for applications in other areas including floating infrastructure assets.

Everyone Knows That O&M Suffering; What’s New?

Meanwhile, it is already a well-known fact that the O&M division is undergoing a rough patch, hence negative news related to earnings or impairments may just be taken in stride by the market. What is of focus will be the flow of new orders. We are valuing the O&M segment based on 1x P/B, given that we do not expect a quick recovery in new order flows. Expectations are low, and while there is unlikely to be any demand for newbuild rigs, there remains the possibility of production-related orders, as well as FLNG orders.

On a group-wide basis, KEP is also trading at 1.0x book, below its trough of 1.2x during the 2008 financial crisis. Our revised fair value estimate of S$7.36 (down slightly from S$7.40 after updating the values of KEP’s listed entities) implies a P/B of ~1.1x. Maintain BUY, given the upside potential of ~15%.